AgDM newsletter article, October 2006
by William Edwards, extension economist, 515-294-6161, firstname.lastname@example.org, Don Hofstrand, extension value-added specialist, co-director AgMRC, 641-423-0844, email@example.com, firstname.lastname@example.org
Below are estimates of the average returns from owning Iow farmland since 1970. Annual returns are in two forms: cash income and change in market value. Total return is the sum of these two.
Cash rental rates are used as estimates of the cash returns to farmland. The rate of cash return (percent) each year is computed by dividing the cash rental rate by the market value of land.
Cash rental rates are a gross return, not a net return, because property taxes and other ownership expenses have not been deducted. These will probably reduce the total return by one to two percentage points. Cash returns have not been adjusted for inflation in the general economy.
Increase (decrease) in value
Another form of return is the annual increase or decrease in the market value of farmland. This increase or decrease is computed as a percentage change in value from one year to the next.
Both the estimated cash rent rate and the land value are based on USDA surveys. They differ slightly from Iowa State University Surveys.
Results over the entire period
Cash returns - As shown in Table 1, the rate of cash return has been up and down since 1970. Returns dropped to only 5.3 percent during the early 1980s due to the rapid inflationary rise in land value. Conversely, the rate rose to 9.7 percent later due to the plunge in land values during the financial crisis of the late 1980s. The average over the period from 1970 to 2006 was 7.2 percent.
Land value change - The return due to changes in land values was much more volatile, ranging from a high of 36.8 percent in 1977 to a low of negative 28.1 percent in 1985. Over the entire period, land values increased by an average of 6.4 percent per year.
Total returns - The total return (annual cash return plus change in land value) was 13.6 percent per year. It ranged from a low of a negative 19.1 percent in 1985 to a high of 43.1 percent in 1977.
Results by financial period
Rates of return have varied greatly during specific time periods over the past thirty-three years. The rates of return during the farm boom period, farm crisis period and the current period are shown in Table 2.
Farm boom period - During the farmland boom period of 1970 through 1981, land values increased rapidly (15 percent on average) providing a total return of 22.3 percent. It should be noted that cash rental rates and land values for the decade before 1970 were very stable. Farmland values and rental rates started their rapid rise in 1973/74 when grain shortages pushed prices to extremely high levels.
Farm crisis period - During the farm financial crisis years of 1982 through 1987, land values declined rapidly - an average of 13.6 percent per year. Cash returns as a percent of land values actually increased during this period because land values dropped faster than rental rates. However, the land value declines more than offset cash returns and the average total return was a negative 5.6 percent.
Current period – After 1987, land values and rental rates resumed their upward trend, although at a slower rate than during the boom period. The average rate of return during this period has been similar to the average rate of return over the entire period. In the past few years land values have increased faster than cash rents.
Results by alternative land purchase dates
Rates of return on farmland investments vary greatly depending on when farmland is purchased. In Table 3, farmland is assumed to be purchased at three different time-periods; the beginning of the boom period (1970), the end of the boom period (1981) and the end of the crisis period (1987). The rates of return for each of these three investment period are shown in Table 3.
Beginning of boom period (1970) - A typical Iowa farmland purchase in 1970 would have been $392 per acre. The value of the farmland 36 years later in 2006 was $2,930, for an increase of 647 percent or 25 percent per year. The average cash return over the period was 23 percent. This was computed by dividing the cash rental rate for each year by the $392 original purchase price.End of boom period (1981) - A farmland purchase in 1981 would have been for $1,941 per acre. The value 25 years later in 2006 was 51 percent higher, for an average increase of 2 percent per year. The average cash return over the period was five percent. The cash return was seven percent in 2006 when cash rents were $130 per acre.
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